2024 4th Quarter US Economic & Investment Market Review

Despite policy uncertainty, the U.S. economy is poised for continued growth in 2025, with stable unemployment, lower inflation, and strong earnings. However, geopolitical risks and fiscal policies may add complexity.
Despite policy uncertainty, the U.S. economy is set for another year of expansion

2024 was another impressive year for the U.S. economy, with resilient consumer spending supporting a fourth consecutive year of above-trend growth. Looking to 2025, policy uncertainty is casting a fog on the economic outlook. That said, none of the proposed policies appear to spell trouble for the economy, at least in the short run and 2025 should be another year of expansion, likely at a trend-like pace, for the U.S. economy.

Stable unemployment and wage growth should contribute to lower inflation
After rising during the first half of 2024, the unemployment rate has stabilized. In 2025, steady economic growth should support continued job gains, reducing the risk of any meaningful increase in unemployment. With stable unemployment, wage growth should also stabilize. This, along with solid productivity gains, should allow inflation to continue drifting lower.
Even as nominal growth slows, earnings are expected to rise with greater breadth
After an impressive 2024, earnings growth is expected to be even stronger in 2025. That said, challenges remain. Slowing nominal growth could limit revenue growth while easing inflation could pressure margins. Nevertheless, trend-like growth combined with stimulative fiscal policies should support solid earnings across a broader range of companies, reducing the risk of elevated concentration and valuations, and increasing opportunities for active investors.
In the absence of major policy changes, inflation could continue its slow slide to 2%
Inflation made meaningful progress towards 2% in 2024, allowing the Federal Reserve to kick off its rate-cutting cycle. While downward momentum waned in late 2024, base effects are largely to blame, and there is little evidence that price pressures are building. Absent any policy shocks, inflation should resume its downward march in 2025 as shelter and auto insurance prices normalize.
Higher tariffs threaten to stall further progress on disinflation

Geopolitical tensions and supply chain snarls induced by COVID-19 have prompted a re-evaluation of open trade policies, and tariffs sit at the center of the Trump administration’s policy agenda. Beyond discouraging imports, tariffs can have negative unintended consequences. If passed, aggressive tariffs could lead to higher inflation and retaliation from other countries, adding further uncertainty to an already foggy economic outlook.

Stricter immigration policies could put upward pressure on wage growth
While the labor market has normalized from its post-pandemic boom, job growth has settled into a relatively healthy pace. Despite weak domestic demographics, labor supply in the U.S. has staged an impressive recovery, largely due to strong immigration. Moving forward, severely curtailed immigration could provide a stagflationary impulse, potentially weighing on economic growth while exerting upward pressure on inflation via higher wages.
In a world of easier fiscal policy, higher deficits and inflationary pressures are likely
The incoming administration has expressed its intent to pursue an expansionary fiscal agenda while dramatically cutting costs, relying on tariff revenue to offset increased spending. However, with tariffs representing only a sliver of government revenues and nondefense discretionary spending only accounting for 12% of government outlays, this plan may be overly optimistic. Without other spending cuts or revenue offsets, expansionary fiscal policy will not only boost deficits but could also act as a longer-term source of inflationary pressure.
Resilient economic activity and policy uncertainty could slow the pace of rate cuts

With inflation trending lower and the labor market softening, the Federal Reserve cut interest rates by 100 basis points in 2024. In 2025, the committee will have a preference to continue easing policy until it reaches a neutral stance. However, resilient economic activity and inflationary policies, if passed, could make this difficult to achieve. A more gradual policy easing path is likely, limiting any downside move in rates. That said, until we gain more clarity on President-elect Trump’s policy agenda, the pace of rate cuts will continue to hinge on the incoming economic data.

Even with corporate credit spreads near all-time tights, all-in yields look attractive
Resilient economic activity, solid earnings growth and subdued default activity helped corporate bonds rally in 2024, narrowing corporate credit spreads to historically tight levels. While valuations across the asset class look expensive, and investors are unlikely to generate meaningful gains from narrowing spreads, investors should embrace credit for its attractive all-in yields.
Active management can help uncover opportunities veiled by rich index-level valuations
At almost 22x forward earnings, the S&P 500 is trading at valuations similar to those seen during the dot-com bubble. However, the difference in valuations between the most expensive and least expensive stocks is wider than it has been 90% of the time over the last 28 years. While this could cause elevated volatility at the index level, it should also create opportunities for active stock pickers, especially as earnings breadth increases.
When allocating abroad, investors should focus on the structural tailwinds rather than the cyclical challenges

As U.S. stocks have enjoyed an extended run of stellar performance, international stocks have long been the underdog. However, the U.S. now also makes up over 65% of global equity indices versus just 25% of global GDP, suggesting that U.S. stocks are relatively expensive, and it might be wise for investors to consider diversifying into other global markets. While many international markets are facing cyclical challenges, structural tailwinds should continue to drive strong performance in select regions, creating plenty of opportunities for active managers.

Alternatives can meaningfully enhance portfolio outcomes
As elevated valuations, low income and positive stock-bond correlation continue to challenge the 60/40 portfolio, investors should consider alternative assets in the portfolio construction process. There are a wide range of assets in the alternatives landscape, each catering to the different investment objectives of alpha, income and diversification. As such, adding a sleeve of alternatives can meaningfully improve portfolio outcomes and help investors reach their strategic goals.